Why Indonesian interest rates will fall, Sharpfokus47
James Brewis
You are very lucky to be able to catch a few wise words from Mr James Brewis. I first met James in the 1,000 islands one weekend in 1996 when we had both newly arrived in Jakarta. He is probably the number one expat broker of all time in the Indonesian stock exchange & is an experienced investor with an ever deeper knowledge of global financial markets. He foresees rising bond yields, commodities.
Rp already High
Money printing
On the subject of rising global bond yields, we both agree. But you might be surprised to know that for me this will mean lower interest rates in Indonesia. Here interest rates have traditionally been very high. If you were here in the late 1990s you might remember they reached more than 50%! That’s because of money printing which led to currency collapse & inflation.
Financial crises
As Milton Friedman said, inflation which leads to higher interest rates is always a monetary phenomenon. There’s usually a debt problem & to solve it the government & or the central bank prints money to pay the debts or to give to the banks to stop them collapsing when depositors take all their money out. That increase in money pushes the value of the rupiah down, interest rates up.
Rupiah is 140,000
The rupiah has gone down a lot. In the 1950s there were about Rp3 to a $. By the end of the decade about 50. During the 1960s it went to 1,000 then 10,000. It was revalued to 1,000 in 1968, went slowly to 2,000 by the mid 1990s then quickly to 10,000 again by 2000 & now 14,000 which is really 140,000! No wonder rates have been high! But on a log scale you can see the rupiah is already not rising any more.
You are very lucky to be able to catch a few wise words from Mr James Brewis. I first met James in the 1,000 islands one weekend in 1996 when we had both newly arrived in Jakarta. He is probably the number one expat broker of all time in the Indonesian stock exchange & is an experienced investor with an ever deeper knowledge of global financial markets. He foresees rising bond yields, commodities.
Rp already High
Money printing
On the subject of rising global bond yields, we both agree. But you might be surprised to know that for me this will mean lower interest rates in Indonesia. Here interest rates have traditionally been very high. If you were here in the late 1990s you might remember they reached more than 50%! That’s because of money printing which led to currency collapse & inflation.
Financial crises
As Milton Friedman said, inflation which leads to higher interest rates is always a monetary phenomenon. There’s usually a debt problem & to solve it the government & or the central bank prints money to pay the debts or to give to the banks to stop them collapsing when depositors take all their money out. That increase in money pushes the value of the rupiah down, interest rates up.
Rupiah is 140,000
The rupiah has gone down a lot. In the 1950s there were about Rp3 to a $. By the end of the decade about 50. During the 1960s it went to 1,000 then 10,000. It was revalued to 1,000 in 1968, went slowly to 2,000 by the mid 1990s then quickly to 10,000 again by 2000 & now 14,000 which is really 140,000! No wonder rates have been high! But on a log scale you can see the rupiah is already not rising any more.
Rp14k good Value
iPhone X,
I’m writing this on an iPhone X, it’s an amazing device. So amazing that you don’t need a computer any more you can do everything on iPhoneonly. It cost about $1,200 here in Jakarta. That’s amazing too because it’s cheaper than in Singapore & even in the U.K. where it costs £1,000 or about $1,300.
Starbucks
I’m writing this in Starbucks drinking a double espresso. iPhones & Starbucks are two examples of things you couldn’t get in Indonesia when James & I first came here. They’ve increased our quality of life, made us more productive & show Indonesia is a freer economy. My espresso is cheap too. It’s about £1.75 which is lower than £1.9 in the U.K.
& Internet
All the research for this is done on my iPhone X using the internet, XL & Linknet. Fast internet is another thing which has enhanced life here, increased productivity & increased freedom. It’s also cheap. XL will give you an all you can eat package for about £13. Linknet broadband is also essential for about £25. Much cheaper than the U.K £30-40. Indonesia at Rp 14k is good value.
No monetary push
Govt is not borrowing
To have the kind of monetary push which makes the rupiah higher leading to higher interest rates you need a debt problem. Right now we cannot have a debt problem because there’s not enough debt. No one is borrowing. The government debt has come down from 90% of gdp in 2000 to 28% of gdp today. Instead we have the inverse problem, the government is taking too much tax out.
Banks aren’t lending
There’s also no chance of a monetary push caused by the baking system because the banks aren’t lending either. They are also taking money out of the economy. Deposits are higher than loans. If the banks did start lending, this would have the effect of increasing demand & would strengthen the rupiah.
BI isn’t lending
The central bank is also taking money next it of the system rather than putting it in. When James & I were first in Jakarta, BI was lending money to the banks who were then lending it out to the market. Today Bank Indonesia is acting as a deposit institution too not lending. It’s also restricting the banks from lending. No chance of monetary stimulus here either.
US up, Indonesia down
Yes we can have higher bond yields around the world. They are pathetically low, Japan 0.04%, Germany 0.4%, UK 1.3%. Only the US stands out at 3%. Here in Indonesia with the rupiah already high, prices cheap & no chance of money printing, interest rates will be different. When rates rise internationally, rates here will fall, just as has been the case in the last 2 years.
iPhone X,
I’m writing this on an iPhone X, it’s an amazing device. So amazing that you don’t need a computer any more you can do everything on iPhoneonly. It cost about $1,200 here in Jakarta. That’s amazing too because it’s cheaper than in Singapore & even in the U.K. where it costs £1,000 or about $1,300.
Starbucks
I’m writing this in Starbucks drinking a double espresso. iPhones & Starbucks are two examples of things you couldn’t get in Indonesia when James & I first came here. They’ve increased our quality of life, made us more productive & show Indonesia is a freer economy. My espresso is cheap too. It’s about £1.75 which is lower than £1.9 in the U.K.
& Internet
All the research for this is done on my iPhone X using the internet, XL & Linknet. Fast internet is another thing which has enhanced life here, increased productivity & increased freedom. It’s also cheap. XL will give you an all you can eat package for about £13. Linknet broadband is also essential for about £25. Much cheaper than the U.K £30-40. Indonesia at Rp 14k is good value.
No monetary push
Govt is not borrowing
To have the kind of monetary push which makes the rupiah higher leading to higher interest rates you need a debt problem. Right now we cannot have a debt problem because there’s not enough debt. No one is borrowing. The government debt has come down from 90% of gdp in 2000 to 28% of gdp today. Instead we have the inverse problem, the government is taking too much tax out.
Banks aren’t lending
There’s also no chance of a monetary push caused by the baking system because the banks aren’t lending either. They are also taking money out of the economy. Deposits are higher than loans. If the banks did start lending, this would have the effect of increasing demand & would strengthen the rupiah.
BI isn’t lending
The central bank is also taking money next it of the system rather than putting it in. When James & I were first in Jakarta, BI was lending money to the banks who were then lending it out to the market. Today Bank Indonesia is acting as a deposit institution too not lending. It’s also restricting the banks from lending. No chance of monetary stimulus here either.
US up, Indonesia down
Yes we can have higher bond yields around the world. They are pathetically low, Japan 0.04%, Germany 0.4%, UK 1.3%. Only the US stands out at 3%. Here in Indonesia with the rupiah already high, prices cheap & no chance of money printing, interest rates will be different. When rates rise internationally, rates here will fall, just as has been the case in the last 2 years.
Have a a great week!
Sebastian
Sebastian